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November 21, 1988


By CBR Staff Writer

The most striking feature about the lunacy of junk bond financings of acquisitions and buy-outs is the extent to which people are questioning the wisdom of it ahead of any crash that would prove the critics right. In similar excesses of the past, the handful of people who questioned what the masses regarded as received wisdom were typically lone voices crying in the wilderness, Cassandras doomed to be ignored until the crash came, whereupon every pundit would suddenly leap in, hindsight blazing, and say how crazy the whole thing had been and how it could not possibly last. The MAI Basic Four Inc bid for Prime Computer Inc, coming just after the lunatic proposals to saddle RJR Nabisco with 20 billion dollars of debt to service at a time when a recession looks to be just around the corner, has all the hallmarks of being the last fling of an about-to-fail financial instrument. The idea of saddling a $1,800m or so a year computer company trading in very difficult markets with almost $1,000m of new debt – at a time when Prime is already 56% geared according to Standard & Poor’s Corp (CI No 1,060) – and suggesting that the resulting company can not only survive and thrive, but will generate big enough surpluses to service the debt that it will then be carrying makes walking on water look like a trivial party trick.

Gobble up its tormentor Perhaps Bennett LeBow and his cronies really do have no intention of pursuing the bid to completion, and his assertions to the contrary are simply the kind of sophistry that one has to indulge in if one wants one’s victim to resort to a Pac-Man defence and turn around and gobble up its tormentor – but no-one should bet even the housekeeping on it. The going rate for junk bonds these days is around 17%, but a calculated assessment of the risks attendant on the paper that a merged MAI-Prime would have to issue demand a coupon nearer 40%. Yet the junk being issued by these junk bond junkies is being bought by pension funds and insurance companies with the monies entrusted to them for the succour of widows and orphans. If the MAI bid succeeds, the resulting MAI-Prime will have to divert so much cash to servicing its debt mountain as to be bereft of resources to invest in research and development, and therefore will be doomed as a high tech company. Perhaps it could reduce its debt by selling something? The original MAI business for example? But LeBow and his sidekicks put that on the block in May and found no takers. The combined Prime-ComputerVision computer-aided design systems business? If that – the one solid property in the slimline Prime empire – is sold, what will be left of the company? The answer is a business that no-one would either want to buy from or to buy. Even without any plans to sell off large parts of the business, so many question marks would be raised over the future of the surviving entity in the proposed merger that many customers would think three times before buying from it – and then call IBM. The final absurdity of the bid is that the new company would find life extremely difficult during a worldwide boom for the computer industry. Yet it is being proposed at a time when of the major computer markets, the US is already in mild recession, West Germany is slowing, and only Japan looks really healthy: parhaps there’s a Japanese Samurai waiting in the wings to rescue the proposed MAI-Prime from oblivion. Could anyone else?

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